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The U.S. Supreme Court issued the Obama administration a significant ruling in King v. Burwell by upholding the availability of tax credits under the Patient Protection and Affordable Care Act (the "Act") for coverage purchased by individuals through a federal exchange. At issue was a provision of the Act providing that the amount of the tax credit available depends in part on whether the taxpayer has enrolled in an insurance plan through "an Exchange established by the State." As the Act allows for exchanges to be created in each state, as well as by the federal government in states that choose not to establish their own exchange, the Internal Revenue Service issued a ruling in 2012 that made tax credits under the Act available for coverage purchased in both the state and federal exchanges.

The significance of the tax credits stems from the Act's adoption of three key reforms to make the healthcare system successful:

The Act provides that each health insurance issuer that offers health insurance coverage in the individual market in a state must accept every individual in the state that applies for such coverage;

The Act generally requires individuals to maintain health insurance coverage or make a payment to the Internal Revenue Service, fearing that without an incentive, many individuals would wait to purchase health insurance until they needed care; and

The Act seeks to make insurance more affordable by giving refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty line.

The parties in King disputed whether the Act authorizes tax credits for individuals who enroll in an insurance plan through a federal exchange. The four individuals from Virginia who were the petitioners in the case contended that a federal exchange is not "an Exchange established by the State" and that the IRS rule contradicts the Act, while the government responded that the IRS rule is lawful because the phrase "an Exchange established by the State" should be read to include federal exchanges.

In an opinion written by Chief Justice Roberts, the Court ruled that the phrase "an Exchange established by the State" is properly viewed as ambiguous—it may be limited in its reach to state exchanges, but it is also possible that the phrase refers to all exchanges, both state and federal, at least for purposes of the tax credits at issue. The Court noted many instances of "inartful drafting" in the Act and that the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.

Given that the Court found the text at issue ambiguous, it turned to the broader structure of the Act to determine its meaning. The Court ruled that the statutory scheme of the Act compelled it to reject the interpretation that the tax subsidies do not apply to coverage purchased through a federal exchange because "it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid." The Court believes that "it is implausible that Congress meant the Act to operate in this manner."

The Court acknowledged that the arguments set forth in the dissenting opinion written by Justice Scalia with respect to the plan meaning of the Act "are strong." However, the Court believes that the context and structure of the Act compel it to depart from what otherwise would be the most natural reading of the pertinent statutory phrase. As a result, the Act allows tax credits for insurance purchased on any exchange created under the Act.

Justice Scalia's dissenting opinion is particularly vocal about the majority opinion, stating that "[w]ords no longer have meaning if an Exchange that is notestablished by a State is 'established by the State.'" Justice Scalia concludes the introduction to his opinion by stating: "Under all the usual rules of interpretation, in short, the Government should lose this case. But normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved."

The King opinion appears to save the Act from falling in upon itself, as the inability of individuals to receive tax credits in the 36 states that have not established their own exchanges would have significantly undermined the principles underlining the affordability of coverage under the Act. In addition, such a ruling likely would have thrown the employer mandate provisions of the Act into chaos, as the applicable penalties become due only in the event that a full-time employee obtains coverage through an exchange and claims a tax credit. To the extent that the employer was located in a state with a federal exchange, no employees would have been able to obtain tax credits, and therefore, the penalties would not be assessed against the employer (even if the employer did not offer the necessary affordable coverage to its full time employees).

The King opinion preserves the status quo with respect to the Act, which will now most likely survive President Obama's second term in the Oval Office.

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